Small Business Accounting 101: Tips to Understand IRS Tax Codes
The United States tax code consists of tax-related rules enacted by the government. The tax code that is officially known as the Internal Revenue Code (IRC) needs to be followed by every individual and business in the country.
A tax code is enforceable by law on individuals, businesses, and transactions such as the sale of properties. The code is subject to any entity that is subject to state and federal laws.
The blog post will further elaborate on the statutory tax codes. Understanding the tax codes will ensure that you comply with the regulations when submitting tax forms for your business.
Important Internal Revenue Codes
Title 26—Internal Revenue Code contains various subsections that deal with different aspects of filing taxes. Here we will take a look at important subtitles of the IRC so that you know the requirements for filing taxes.
Subtitle A—Income Taxes
The income tax section of the IRC specifies the different types of taxes that should be paid by individuals and businesses. The tax codes specify the income that must be reported by taxpayers from business, employment, part-time work, or side jobs.
The American Rescue Plan Act of 2021 fixed a new threshold for reporting income. The threshold for third-party payment transactions has been lowered from an aggregate amount of $20,000 to just $600. Any business or individual with an income of more than $600 must submit Form 1099-K for third-party payments.
An important point to remember is that Form 1099-K does not apply to money received from relatives or friends as a gift or reimbursement. Any mistake in the form should be corrected by contacting the issuer of this Form. The IRS does not correct any misstatements in the filed form
Another important thing to remember is that the credit amount for income taxes changes each year. So, you need to visit the IRS website to find out the credit amount allowed for each transaction. The Interactive Tax Assistant on the website will help you to know about credits such as Dependent Care Credit (DCC), Earned Income Tax Credit (EITC), Premium Tax Credit, and Child Tax Credit (CTC). In 2022, you can also avail yourself of the Inflation Reduction Act of 2022 to reduce taxable income.
You can visit the IRS website to know about the eligibility criteria for the different types of taxes. No new tax incentives are expected for 2023. The decision has been taken by the government since there were significant events that Impacted the economy in 2022.
Taxpayers must itemize the deductions to deduct expenses from donations. No deductions will be allowed if the deductions are not itemized.
Receiving Tax Refunds
Businesses are advised not to wait for tax refunds from the federal government for the previous year. The reason is that the refunds are not final, and they are subject to detailed review. It may take longer for the refunds to get to you.
Refunds by the IRS generally take time. For instance, the Earned Income Tax Credit (EITC) will be issued after mid-February. The IRC withholds the entire refund and not just the portion of the refund that is being investigated.
Subtitle B—Estate and Gift Taxes
Estate and gift taxes are explained in Subtitle B of the IRC. The taxes apply to large amounts left by an individual for another while alive, or gifts, and amounts left after death – estate.
Remember that a unified rate is applied to the cumulated taxable estate and gifts. In other words, the estate and gift taxes apply to the net tentative estate and gift amount.
Estate and gift taxes are calculated after deducting applicable credits such as the basic exclusion amount (BEA). This credit is first applied against the gift tax and the credit remaining after death is applied against the estate tax.
Subtitle C—Employment Taxes
The IRC subsection deals with all matters related to employment taxes. Employers are legally required to report and also deposit employment taxes deducted from employees’ wages. You should review the Employment Tax Due Dates mentioned on the IRS website to ensure timely payment of taxes.
Form W-2, Wage, and Tax Statements are submitted to report the salaries, tips, and other payments to the IRS. Businesses must report both cash and non-cash payments to each employee.
Businesses must fill out Form W-3, Transmittal of Wage, and Tax Statements to submit Form W-2 to the Social Security Administration (SSA). In addition, they must send a copy of Form W-2 to each employee so that they can report the correct wages paid to them.
Employers are required to follow the withholding method mentioned in Publication 15-T, Federal Income Tax Withholding Methods. They can use Form W-4, and Employee’s Withholding Certificate to prepare the employment tax report.
Here are some of the taxes that every business is required to withhold as per the IRS.
Social Security and Medicare Taxes
Employers are required to withhold social security and Medicare taxes from the wages of employees. They are also required to contribute an equal amount to the IRS.
The rates of social security and medicare taxes are different. Moreover, there is a wage limit to the social security tax. The maximum wage that is subject to the security tax is mentioned in the IRC publication.
The withholding amount for social security and Medicare taxes is determined by multiplying the employee tax rate with each payment due. The tax rates and wage limit are specified in Publication 15, (Circular E), Employer’s Tax Guide.
Additional Medicare Tax
Employers are required to withhold additional Medicare tax of 0.9 percent from the wages and compensation of employees exceeding $200,000 in a year. The additional Medicare tax must be withheld in the period when the wages exceed the specified amount. The additional tax must be calculated every time the payment exceeds the amount until the end of the year.
Remember that there is no matching amount for additional Medicare tax, unlike the social security and Medicare tax. You can find out more information about this IRC by referring to the Additional Medicare Tax and Publication 15.
Federal Unemployment (FUTA) Tax
Federal Unemployment (FUTA) tax is paid and reported in addition to the social security and Medical taxes and federal income tax. This tax is paid from the funds of the business. The amount is not deducted or withheld from the wages of employees.
Publication 15-A, Employer’s Supplemental Tax Guide for more information on FUTA tax contains more information about this tax. The publication contains information about the requirements for depositing the tax that varies depending on the type of business.
Self-Employment Tax
Self-Employment Tax (SE tax) is social security and Medicare taxes that are paid by self-employed individuals. The tax is withheld, paid, and reported by self-employed individuals.
Subtitle D and E – Excise Taxes
Subtitles D and E of the IRC deal with the excise taxes that are imposed on different types of business activities, goods, and services. The taxes are imposed on consumers, retailers, and manufacturers depending on the specific circumstances.
You can file excise taxes by submitting Form 720, Quarterly Federal Excise Tax Return. The income tax form is available online for electronic tax submissions. You can file the tax online using tax software that is approved by the IRS. Electronic filing of excise taxes provides the benefit of immediate and faster service.
Excise Taxes on Chemicals
Excise taxes on chemicals were dropped after the passing of the Infrastructure Investment and Jobs Act (IIJA) in 1995. But from July 1, 2022, the taxes are reinstated on certain types of chemicals including imported chemical substances.
Excise Tax on Coal
IRC 4121 has specified excise tax on coal extracted from mines in the US. The tax is imposed on all coals sold that are mined in the country. This tax is deposited in the Black Lung Disability Trust Fund.
Excise Tax on Kerosene Used in Aviation
Form 720 Tax Liability Reporting specifies the tax on Kerosene used by airplanes at $0.244 per gallon. An exception to this tax is when Kerosene is removed from a refinery, terminal, or a qualified tanker, refueler, tank wagon, or truck and put directly into the aircraft’s fuel tank.
Extended Fuel Tax Credits
The Inflation Reduction Act has extended credits for a fuel tax to Dec. 31, 2024. The tax credit provisions are stated in Public Law 117-169, 136 Stat. 1818.
Heavy Highway Vehicle Use Tax
Heavy highway vehicle use tax is applicable on the use of vehicles that weigh 55,000 or more on the highways. The tax is filed by submitting Form 2290. This tax must be paid by the companies between July 1 and July 30.
The deadline for filing taxes is based on the month the vehicle was used first on highways during the period of reporting. For instance, if the heavy vehicle was used on a public highway in July then the deadline for reporting the tax is August 31. You must submit Form 2290 before the last day of the month following the use of the heavy vehicle on the highway.
Excise Tax on Indoor Tanning Services
Companies that offer indoor tanning services are also required to submit the excise tax. The Affordable Care Act has specified a 10 percent rate on the income from indoor tanning services.
Excise Summary Terminal Activity Reporting System (ExSTARS)
Excise Summary Terminal Activity Reporting System (ExSTARS) is a fuel-reported system that was developed by the IRS in coordination with the motor and fuel industry, the Department of Transportation, and states.
ExSTARS shows the movement of the fuel into and out of the terminal approved by the IRS. A storage location is specified by a facility control number (FCN). This number specifies the storage location within the bulk transfer, renewable fuel production, or motor fuel terminal system.
Form 720-CS, Carrier Summary Report, and Form 720-TO, Terminal Operator Report are submitted to report the income from the terminal operation. You can find out more information about filing and reporting the excise tax in Publication 3536 – Motor Fuel Excise Tax EDI.
Subtitle I—Trust Fund Code
Trust fund taxes are the net taxes that are withheld by an employer from the wages of employees. The tax includes income taxes, Medicare taxes, and social security taxes.
The taxes withheld from the wages of employees are referred to as trust funds as they are payable to the Treasury. The taxes are held in the trust fund until they are paid. Employers are required to pay the amount in the trust fund by making Federal Tax Deposits (FTD). You can find out more information about the trust fund code in Publication 3151, The ABCs of Federal Tax Deposits.
The trust fund contains the social security, and Medicare taxes withheld from the employee’s wages as well as matching contributions. You should pay the income tax, social security, and Medicare taxes in the funds through the Federal Tax Deposit System. Publication 15, Circular E, Employer’s Tax Guide contains more information about the trust funds.
How to Contact IRS for More Information?
IRS Publication 910: Guide to Free Tax Services contains contact numbers of IRS departments. The publication also contains instructions on calling IRS representatives for clarification regarding the tax codes.
Make sure that you have the appropriate tax schedule, form, notice, and other documents related to the question before contacting an IRS representative. You will need to provide detailed information regarding the matter to know the proper codes for submitting taxes. You must mention the exact IRS publication and other sources about which you want clarification.
Remember that the IRS representative will not be held responsible for any errors or omissions in the publication. The IRS has specifically offered a disclaimer that the taxpayer will be responsible even if the representative gives wrong information. You will be held responsible if during a subsequent audit it was found that you had paid less tax.
You cannot place the blame on an IRS representative for providing the wrong information. So, you must verify the information provided by the consultant by doing your research. You need to double-check to make sure that the information provided by the representative is accurate. Ask for a reference to any particular tax code and rates to ensure that you are provided with the right information.
But you will not be charged a penalty by the IRS for posting wrong information if you have been misled by the representative into underpaying your taxes. You should note down the name and title of the representative and also the time and date of making the call. The information will be important in avoiding the penalty for errors made in filing taxes due to the wrong advice of a representative.
IRS Penalties for Violating Tax Codes
Every individual and company must submit taxes following the provisions of the IRC. The tax authority imposes a penalty for not submitting tax documents as per the tax codes. The penalty is imposed for the following reasons.
- Mistakes resulting in inaccurate information in the tax returns
- Not paying taxes on time
- Not submitting the right forms specified by the tax code
- Not paying the full tax amount due
Remember that some penalties are charged each month until the tax amount is paid in full. You should know about the different types of penalties and how to avoid them.
The IRS will send you a notice when it charges a penalty. The notice or letter that is typically sent by mail contains information about the penalty including the reason and also the next steps to resolve the issue. You should note down the identification number stated in the notice for further correspondence with the IRS.
The penalty imposed by the tax authority must be paid by the due date. An interest rate is changed on the penalty that is not paid on time. The date when the interest is charged varies for each type of penalty. The amount that you have to pay to the authority will keep on increasing until you pay the full amount.
The IRS may charge different types of penalties. The penalty may be charged if the taxpayer does not provide the required information such as the payee statement within the due date.
The penalty is also charged for not filing the tax return as per the specified date. In addition, a separate penalty is charged for not paying the tax amount due.
You may have to pay a penalty for entering the wrong information in the tax return. For instance, you will be charged a penalty if you claim deductions for which you don’t qualify or don’t disclose all your income.
A penalty will also be charged if you submit a claim for a credit or refund without a reasonable cause. Moreover, you will have to pay a penalty if you don’t deposit the full amount in the trust fund that contains employment taxes including income tax, social security, and Medicare taxes.
The IRS will impose penalties if you submit checks or other types of payment instruments that your bank does not honor. Moreover, you will also pay a penalty when you don’t pay the estimated tax accurately or within the due date.
Taxpayers can also be imposed a penalty for misconduct with the tax representative when filing taxes. Moreover, taxpayers who provide wrong information about foreign financial transactions have to pay a fine to the IRS.
Request for Removal or Reduction in Penalties
You may request the IRS for removal or reduction in the penalties if you convince the tax authority that you have acted in good faith. You must get the penalties removed or reduced if you provide a reasonable justification for not meeting the requirements of the tax code.
Understand the Impact of Tax Codes on Returns
Tax codes determine the information that you need to provide regularly to the tax authority. The IRS publishes documents that explain how taxpayers can meet the requirements of the tax codes. All information in the IRS publication is based on the tax codes.
You need to understand the income that must be reported and the deductions that can be claimed each tax season. If this seems like a daunting task, you should consider contacting a certified public accountant (CPA) or tax consultant.
The Use of Tax Software for Efficient Tax Management – (maximliberty.com)
Accounting and tax professionals have detailed information regarding tax codes and regulations. The IRS publishes documents for certified public accountants (CPAs) and tax attorneys that offer a detailed explanation regarding tax codes. The documents that are published by Tax Analysts and CCH cost thousands of dollars.
Professional publications contain complex technical information that cannot be understood by a layperson. These documents can only be understood by a professional with detailed knowledge and experience of the tax laws.
You can get greater insights into the tax codes and requirements by consulting with an experienced accounting and tax professional.
Accounting professionals can help you in decoding tax codes. Understanding the tax codes will help ensure that you correctly file the tax returns. It will help in the accurate preparation of tax returns with the right income and deductions.
Outsourcing bookkeeping tasks is also recommended as it will help you focus on important aspects of the business. You will be able to focus on the timely and accurate preparation of tax returns that meets all the requirements of tax codes.
Maxim Liberty is an online bookkeeping service provider. Our affordable virtual bookkeeping services comply with the generally accepted accounting principles (GAAP). If you want to outsource bookkeeping tasks for your business, you can contact us today by dialing (703) 957-6938.
